AboutWillard R. Brumbaugh, LUTCF Expertise I have answered many questions regarding 401ks, IRAs and annuities as well as life insurance.
I have been counselling against most Qualified Plans since 1994.
Experience Ranked in the top 5 in retirement catagories at Askme.com most of its last 2 1/2 years. Organizations I belong to:
National Association of Insurance and Financial Advisors-California
Inland Empire Estate Planning Council
Education/Credentials Life Underwriters Training Council Fellow
Question QUESTION: Thanks for being an expert...I love this website!
I live in DC and will be moving to a job making $144K per year. My current company has a 401(k) but the new company does not. First, I want to know if I will be able to rollover 100% of 401(k) into my traditional IRA (regardless of the amount). Second, what is the best way to invest in my retirement beyond the traditional IRA limit since the new company does not offer a 401(k)?
ANSWER: Dear Chris,
You need to transfer directly from your 401(k) into a "pour-over" IRA. This would be different from your yearly deposit IRA, since the deposit far exceeds your annual maximum.
If you were to receive the 401(k) to be deposited later, your employer would be required to withhold 20% to send to the IRS. If you did not restore that withholding, and you are less than 59 1/2, you would be subject to the 10% Premature Distribution Penalty along with income tax on that 20%.
By now I imagine that you are aware that you do not save on taxes by contributing to a 401(k), that you are merely postponing the inevitable. Building a tax advantaged retirement program is difficult at your income level. Could you provide me with your age, gender, family situation, and how long you expect your new employment will last?
Willard R. Brumbaugh, LUTCF
www.willardbrumbaugh.com
(888) 792-2379
---------- FOLLOW-UP ----------
QUESTION: Thanks for the quick reponse. I'm 38, divorced with one child, and I would expect to be at the new job 3-5 years at least. I have a few more questions to make sure I understand:
1) I have a traditional IRA, but you're saying that I will have to open up a new IRA specifically for transferring my 401(k)...correct?
2) Given my income, I will not get a tax deduction for my IRA contributions, regardless of whether my employer offers a 401(k)...correct?
3) Given my income, the only tax benefit I'm going to get is on the earnings in my IRA...correct?
4) In evaluating the compensation package of my new employer, what I lose in regards to 401(k) is the additional interest that would have been earned on the additional contribution I would have been able to make as a result of the tax deduction. Is my logic straight on this?
5) If I reinvest eveything I earn in a typical mutual fund investment (i.e. not a retirement account) will I have to pay taxes if I don't withdraw funds throughout the year?
Answer 1. Publication 590 says that you can roll the 401(k) into a traditional IRA. Nothing I read states that it must be a separate IRA, but this is an opportunity to take advantage of special first year bonuses or excess interest.
2. Since your new employment does not include a qualified retirement plan, you can contribute to a traditional IRA. At your age, for this year, you can contribute $5,000.
3. All earnings are tax-deferred till withdrawn. Since these earnings along with the contributions have not been taxed all distributions will be taxed. There is no true tax savings in Qualified Plans, only deferral till funds are withdrawn.
4. Since the earnings ultimately are taxed, there is no gain or loss regarding tax treatment of interest. What you have lost is what you are not receiving, which is an employer contribution. This falls into my area of recommendations, by which I propose that employers provide a pure Profit Sharing Plan, instead of a 401(k). Profit sharing simply makes more sense.
5. Here is the surprise! You can actually end up being taxed on funds inside a Mutual Fund even as it loses value. I have seen this happen. This comes about when the fund sells stocks that have appreciated, even while one's mutual fund shares have lost value.
As a result of your age, income and status as a parent, I suggest that you set aside $1,000 per month or more into a combination of deferred annuities and life insurance, with at least $300,000 in Face Amount for your child. Permanent life insurance and annuities both provide tax-deferral on interest earned. And in the event of your death, only the interest in the annuities would be subject to income taxes. (If the annuities are in an IRA, the both earnings and contributions would be taxed.)
An estate planning attorney would suggest that these should be backed up with a living trust with your child as beneficiary (of the trust, not the insurance policy). The trust would be funded by your life insurance along with your retirement funds at your passing. By having this trust you can determine who would be trustee and how the trustee would distribute the funds to your child.
Willard R. Brumbaugh, LUTCF
www.willardbrumbaugh.com
(888) 792-2379
